Robin Muncy

Nintendo: Maintaining Competitive Advantage

MGT 499 Spring 2011

Abstract Nintendo has been a major contender in the video game industry for the past several decades, and has faced the challenge of developing and maintaining competitive advantage over the years. With the introduction of the Nintendo Wii console, the company gained a stronghold as a leader in the video gaming industry. However, competitors Sony and Microsoft are quickly gaining on Nintendos competitive advantage, forcing the company to monitor and reevaluate its strategies. To maintain a competitive advantage, Nintendo must look toward influencing the customers of Sony and Microsoft, continue developing innovative technologies, and also consider the impact of social networking and mobile devices on the gaming industry.

3 History of Nintendo Nintendo Co. Ltd began its long history at the turn of the twentieth century as a Japanese manufacturer of playing cards. The company went public in the 1960s, and by the 1970s Nintendo had begun directing its focus toward electronic toys and video games. Nintendo became a leader in the video game industry in the 80s and 90s with its home video game consoles and popular game titles. Competitors began to emerge in the 90s; the release of Sonys PlayStation platform broadened the video game market, and the rising popularity and improvement of PC technology led to the use of PCs as gaming platforms. Capitalizing on the popularity of PC gaming, Microsoft developed its Xbox game console in the early 2000s. While the competition focused on technological advancements to make improvements to existing game consoles, Nintendo developed a new type of console that would give way to a new gaming experience the Wii. The release of the Wii in 2006 secured Nintendos competitive advantage in the video game industry. External Environment Understanding Nintendos current competitive advantage over its rivals involves analyzing its external environment to identify the companys threats and opportunities. Three types of external environments must be analyzed: general, industrial, and competitive. General Environment By general environment we refer to the demographic, economic, political, sociocultural, technological, global, and physical elements that affect the market in which Nintendo operates. Nintendos current strategy with the Wii game console is to target a demographic that was neglected in the past: non-gamers of all ages and genders. Because the company targets such a wide demographic, Nintendos in-house game designers have the opportunity to target niche

4 markets within that demographic. However, from a sociocultural standpoint the company is geared toward a family-friendly ideology, which could limit the types of games Nintendo produces, and may threaten the companys competitive advantage. Furthermore, the companys focus on non-gamers could threaten future game console designs because the focus demographic demands simple, easy-to-use equipment. Yet another threat could emerge from the economic environment. Although the economy seems to be improving overall, a recent USA Today article states that sales of game consoles such as the Wii have declined from $21.4 billion in 2008 to $18.7 billion in 2010, despite an increase in the number of people who play video games (Snider, 2011). Further information from BBC News shows that Nintendos net profits decreased by 74% in 2010 (Buerk, 2011). Few, if any, political or legal restrictions face Nintendo; similarly, Nintendo has escaped blames for environmental damages. Perhaps Nintendos biggest opportunities lie in the global and technology segments of the general environment. Nintendos global presence gives the company the opportunity to continue developing products for many different markets. Furthermore, technology is particularly vital to Nintendos success and presents the most opportunities for the firm. Because the company offers a technological product, and technology is always improving, Nintendo continually has opportunities to integrate new technology into its products. Industrial Environment Nintendo operates in an industrial environment that is more specific than the general environment and can be analyzed based on the threat of new entrants into the industry, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and the

5 intensity of rivalry in the industry. Video games can be a very profitable venture if a firm can differentiate itself. The video game industry is unlikely to see many new entrants for several reasons. For one, several barriers inhibit entry in the industry. Video game and console development, production, and marketing are costly. Current industry strongholds, such as Nintendo and Sony, have refined their business processes and gained economies of scale. Additionally, new console developers must differentiate their products, but they could expect the big companies in the industry to retaliate via marketing or pricing. Because the industry provides a unique, patented, technological product, suppliers in the industry are moderately powerful. Firms depend on effective parts for gaming consoles, such as computer chips and video cards. Also, the industry faces threats that suppliers of hardware components could forward integrate and start producing their own gaming consoles. Buyers have a fair amount of power in the video game industry, especially for Nintendo. Whereas Sony and Microsoft have other sources of revenue, Nintendos main source of income is from the sale of games and game consoles. If buyers chose to buy a PlayStation or Xbox over the Wii, then Nintendos profits would dip. Likewise, buyers have options; if they are dissatisfied with Nintendos game console or game offerings, they can buy from Sony or Microsoft. The threat of substitutes is very real in the video game industry. Although video games and game consoles are differentiated products, consumers may conclude that each company is similar enough to fulfill the same role entertainment. However, one factor that may lessen the threat of substitutes is switching costs. Since Nintendos Wii console is the cheapest of the three main competitors, switching costs work to Nintendos advantage.

6 Rivalry is intense in the video game industry. Nintendo, Sony, and Microsoft continually compete to differentiate themselves from each other. When one company introduces an innovative technology, the others must create even more advanced products. Competitor Environment Nintendos competitors actions will ultimately determine Nintendos reactions. Nintendo can understand its competitors by analyzing their future objectives, current strategy, assumptions, strengths, and weaknesses. The future objectives of Sony and Microsoft are generally protected as trade secrets. However, we can speculate on their current strategies. For one, Sony is currently working on lowering the price of the PlayStation portable by $40, and is also introducing a discounted Greatest Hits line of games (Molina, 2011). Additionally, PlayStation released a motion-sensing game controller called PlayStation Move to compete with the Wii console. A current strategy of Microsoft is its Xbox Kinect system, which resembles the gameplay of the Wii but is controller-free. As for strengths and weaknesses, one of Sonys major strengths in the past was the popularity of the PlayStation2 game console. PlayStation3, however, has been weaker; it has suffered from poor sales and a very high selling price. A major strength of Microsoft was the companys decision to release the Xbox 360 at the beginning of the business cycle. Because Microsoft is the youngest player in the industry, one weakness may be that the company is still refining its business processes to reach economies of scale. The case states that both Sony and Microsoft incurred losses on their latest game consoles, a major weakness for both firms.

Current Strategy

7 Nintendos current strategy focuses on creating consoles and games geared toward nongamers and families. The companys important resources include its research and development team, marketing team, manufacturing processes, and the companys management, headed by Satoru Iwata. These resources create valuable capabilities, such as Iwatas ability to predict the future of video gaming. The companys R&D gives it a capability in innovative technology and game concepts, while marketing has allowed the company to create an effective brand. Efficient manufacturing processes allow Nintendo to reach economies of scale and produce the Wii console at a cost lower than the production of competitor game systems. Nintendos core competencies lie among these capabilities. Iwatas vision, as well as the companys R&D team, gave rise to Nintendos Wii console and in-house game development department. These capabilities are core competencies because they are valuable, rare, and temporarily nonsubstitutable. Therefore, the Nintendo Wii and the games developed for the game system give the company a temporary competitive advantage until competitors produce comparable imitations. As seen earlier in this case analysis, Sony and Microsoft have already introduced comparable products that mimic the Wiis gameplay. Another core competency is Nintendos brand. The company is perceived as a classic leader in video gaming, which is a valuable and rare capability for Nintendo. Recommendation To maintain the competitive advantage created by the Wii console, Nintendo must consider many possible courses of action to find new competitive advantages. One way to compete is to broaden its video game genres beyond simple, family-friendly games. Games for the PlayStation and Xbox consoles often focus on intricate fantasy role-playing games (RPGs) for mature audiences. Although Nintendo has some RPGs, notably The Legend of Zelda series,

8 its current focus is on puzzle and exercise games. If Nintendo were to introduce a more varied selection of video game genres to its software collection, the company would be in a better position to pull customers from Sony and Microsoft. However, this could risk damaging Nintendos brand, as it would be challenging to move away from the family-friendly image without the possibility of backlash. A second course of action for Nintendo is to continue developing innovative game technology. With the insight of Satoru Iwata and game designer Shigeru Miyamoto, Nintendo should continue looking to the future of video gaming. A recent article by BBC News discusses Nintendos recent introduction in Japan of the 3DS, a hand-held console that allows users to play games in three-dimension (Buerk, 2011). The article points out that Nintendo is a leader in handheld consoles, and this new console definitely helps the company maintain its competitive industry in that field. Nintendo could work on developing a similar 3D capability for the Wii, to further revolutionize the gaming experience. Lastly, Nintendo should consider expanding its reach to social networking and mobile devices. Mike Snider, USA Today, recently wrote about the popularity of games for Facebook and smartphones. According to Snider, Facebook game developer Zynga has increased its value to $9.3 billion and more than one-third of smartphone owners play games (Snider, 2011). Snider explains, mobile games do not seem to be cannibalizing traditional games (Snider, 2011). Nintendo should consider tapping into this industry and designing simple, puzzle-type games for Facebook and mobile devices. This would align with the companys current focus on simple games for non-gamers and may open the brand to a new market, given the popularity of smartphones. The company could even develop capabilities to allow users to play social networking games on the Wii console.

9 To conclude, Nintendo must continue pressing forward with innovative technology and game concepts. The company faces a great deal of competition, but also has many options to help maintain its current competitive advantage. Careful consideration of the companys current strategy, and the environment in which it operates, will lead Nintendo toward an effective strategy to maintain competitive advantage and ensure success. References Buerk, R. (2011). Nintendo bets on 3D gaming amid slumping profits. BBC News. http://www.bbc.co.uk/news/business-12593712. 28 February. Molina, B. (2011). Sony drops price of PlayStation portable to $130. USA Today. http://content.usatoday.com/communities/gamehunters/post/2011/02/sony-drops-price-ofplaystation-portable-to-130/1. 25 February. Snider, M. (2011). Social media, mobile devices help video games grow. USA Today. http://www.usatoday.com/money/industries/technology/2011-03-01videogames01_CV_N.htm. 28 February.